«ΣΠΟΥΔΑΙ», Τόμος 43, Τεύχος 2ο, Πανεπιστήμιο Πειραιώς / «SPOUDAI», Vol. 43, No 2, University of Piraeus
THE ECONOMIC EFFECTS OF INDIGENOUS ARMS
PRODUCTION IN GREECE
By
Christos G. Kollias
University of Crete
Abstract
This paper examines the economic effects of domestic arms production in Greece. It investigates for
possible economic spin-offs through backward and forward linkages in five sectoral outputs of the Greek
industry. Empirical results reported here indicate that positive economic spin-offs from indigenous arms
production are so far negligible. (JEL L60, L6)
1. Introduction
The effects of military spending on growth and development is a controver­
sial subject. Authors (Benoit 1973, 1978; Kennedy 1974) have claimed that
defence expenditure can have a positive impact on the economy. On the other
hand, other writers (Faini, Annez and Taylor 1980; Deger and Smith 1980) have
shown that military spending has a net negative impact and hinders economic
growth. However, many of the latter studies tend also to accept that such expen­
diture can have some positive economic spin-offs. Such spin-offs take essentially
two forms: a) effective demand creation through domestic production of mil­
itary inputs and b) increasing productivity through technological progress (crea­
tion of new skills and R & D stimulation). It has been argued (Mosley 1985) that
defence spending can be used as a countercyclical stabilization policy. In a
typical Keynesian fashion it can create effective demand and counter a recession.
However, any such beneficial effects can not be expected to fall pervasively on
the whole economy. Rather they will concentrate on specialised industries with
which linkages are high, i.e. industries with intermediate and/or final products
for military use.
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This study examines the spin-offs of military spending on such industries in
the case of Greece. In relative terms, Greece is the highest military spender in
NATO and Europe, allocating yearly an average 6% of GDP to defence. Since
the mid-70s she has been engaged in domestic arms production. If there are any
substantial beneficial spin-off effects from military spending they should be
evident in the Greek case.
2. Defence Considerations and Indigenous Arms Production
2.1. Motives for Domestic Arms Production
There are two main ways in which demand for weapons can be met. Arms
can be either bought from abroad or produced domestically. Since the two
options are not mutually exclusive a country can opt for a combination of both.
At most, any given state has four alternatives for weapons acquisition: it may
purchase weapons from one or several suppliers who can either be located at
home or abroad. Clearly, whichever alternative or combination of alternatives a
country opts for it must involve some costs and benefits of economic, political
and military nature. It is the latter that are of particular importance for most
countries with acute defence problems such as Greece.
In practice, most countries especially smaller - peripheral states rely almost
exclusively on imports for their armaments. However, since the 1960's there has
been a steady trend towards indigenous arms production by smaller countries.
Ayres (1983) attributes this to the way weapons suppliers and especially the
major powers often use arms supplies as instruments of national policy. They
often use then as means of exerting pressure and influence over the recipient
country especially in times of conflict. Broadly speaking there are three factors
that determine the arms supply policies of the major arms exporters:
a) The hegemonic factor, which may influence the flow of arms from the
supplier with the aim of achieving or maintaining a position of hegemony or
domination over the recipient country or in the region.
b) The industrial factor, which refers to the economic advantages of arms
sales which may result in large scale production runs of the particular weapon.
c) The restrictive factor, whereby the supplier may refuse to provide any
arms or certain types of weapons if it is felt that this may turn to be against any
of the interests of the supplying state.
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It is the way that the restrictive factor has often been operated by the major
suppliers of armaments (although not very successfully) that has prompted
many countries to a) rely on.more than one external source of arms supply and
b) to seek to develop a domestic arms industry which would at least offer a
minimum level of self sufficiency in armaments.
Domestic production of arms and of course their maintenance may promote a nation's independence in pursuing its own policies or at least offer a
degree of manoeuvre that would not have been available otherwise. Thus, the
risk (and concomitant fear) of cutoffs, embargoes or slowdown in supply of
arms and/or spare parts in periods of crises is to a certain extent reduced.
Furthermore, the establishment of an arms industry, particularly in a small
developing country, may have considerable domestic political significance as a
source of national pride and as a sign of increased sovereignty and independence.
2.2. The Greek Case
Before the 1974 Turkish invasion of Cyprus, Greece relied for her armaments almost exclusively on imports. A large part of the weapons and the
equipment used by her armed forces was either bought or provided as aid by the
United States. Since then there has been a continuous effort to diversify the
sources of arms supply. The share of U.S. weapons procured steadily declined
mostly in favour of West European arms. U.S. weapons accounted for more
than 80% of all weapons imported by Greece in the period 1965-74. Since then it
steadily declined to reached 42% in the 80s remaining nevertheless the single
biggest source for weapons supply. At the same time, it was felt that in case of an
armed confrontation with Turkey, Greece may be faced with a slow down in the
flow of arms and spare parts. She would have to rely on her own defence
capabilities with minimum if any external assistance from her allies. The development of domestic arms production facilities was seen as an important step
towards achieving a degree of minimum military self sufficiency. A number of
industries were set up, mostly joint ventures between the Greek state and foreign
companies. Most prominent between them are the Hellenic Aerospace Industry
(EAB); the Hellenic Arms Industry (EBO); the Hellenic Industry of Vehicles
(ELBO). Along side the main defence industries there exists a number of small to
medium sized enterprises manufacturing mostly under licence small components, spare parts and light infantry weapons for the Greek Armed Forces and
some for exporting. Fifteen years after the original ambitious plans the defence
industry has achieved some degree of import substitution in weapons require5
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ments in such areas as: ammunition, portable weapons, trucks & jeeps,
armoured personnel carriers and infantry fighting vehicles, airplane and helicopter maintenance. These however, represent only a small portion of the total
requirements of any armed forces. The majority of armaments needed still have
to be imported, including sophisticated advanced weapons systems such as:
combat helicopters, fighter planes, modern naval units, electronic equipment; all
of which are of paramount importance for the successful conduct of military
operations.
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3. The Economic Effects of Domestic Arms Production
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3.1. Stages of Production
The ultimate objective of domestic arms production policies is to get as
close as possible to self-sufficiency in weapons. Such goals have been expressed
by a number of countries (e.g. India, Israel, Brazil, Argentina, Turkey) and
Greece has not made secret of the fact that she aims for a similar target in certain
key areas. However, autarky in weapons is impossible to achieve in the short to
medium term. It requires massive investment and then, on the basis of international experience only with partial success despite the vast resources pushed into
defence production.
To understand the difficulties involved we need only consider the stages
required for the build-up of domestic arms production facilities. This process
can be separated into seven major stages:
1) Arms are imported but are serviced and maintained domestically.
2) A licence to produce arms locally is acquired and production facilities are
built which, however, require a lot of technical and personnel assistance from
the supplier.
3) Production begins and to start with it involves local assembly of
imported sub-assemblies.
4) The sub-assemblies are now assembled locally from imported components and some may be re-exported to the licensor.
5) Components are manufactured locally from imported raw materials.
6) Local production of raw materials.
7) Complete indigenous production including design, raw materials and
manufacture.
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Even countries that have been pursuing military self-sufficiency for many
years (e.g. India, Israel) have not reached the last stage. The difficulties of
creating an independent defence industry are also evident in the Greek case.
Most of the weapons produced locally are overseas models made under licence.
The implication being that given the complexity of modern weapons, it is
extremely difficult for a small country to achieve a satisfactory level of autarky
and independence of action in anything but the very basic weapons, maintenance and spare parts. Nevertheless, it is still interesting to consider the likely
economic spin-offs of domestic defence production.
3.2. Economic Linkages and Spin-offs
Arms production is a branch of the manufacturing sector and we can expect
some links between domestic production and the rest of the industrial sector.
Once the arms industries have been set up, they will have backward and forward
linkages creating inter-industrial demand and concomitant spin-off for the
underlying industrial base. Of course, a relative well developed industrial base
may be a necessary (but not sufficient) precondition for a given country to
embark on the process of manufacturing arms. If the production of arms is to
generate any linkages in the domestic economy then, the manufacturing sector
must be able to supply the necessary inputs that will be required by the defence
industry. Needless to say that not all the branches of the manufacturing sector
are relevant to the production of arms. Only certain branches of manufacturing
may be of use in terms of linkages to the arms industry. It is with these specific
industries rather than the whole of the existing industrial structure that the arms
industry will have to develop crucial technical linkages. Kennedy (1974) identifies and lists nineteen industries as being important for arms production. All of
them are contained within seven major three-digit manufacturing sector categories (as grouped by ISIC). They are:
1. Iron and steel (29 sub-categories)
2. Non-ferrous metals (33 sub-categories)
3. Metal products (15 sub-categories)
4. Machinery (64 sub-categories)
5. Electrical machinery (32 sub-categories)
6. Ship-building and repairing (4 sub-categories)
7. Motor vehicles (10 sub-categories)
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In his important work Kennedy (1974) refers to them as the Potential
Defence Capacity (PDC) group of industries whereas others call them the Potential Arms Production Base (PAPB) (Wulf 1983). Whatever name is adopted, it is
generally accepted that this group of industries is important in terms of arms
production. The corresponding classification in Greek data sources is (i) basic
metals, (ii) metal products, (iii) not electrical machinery, (iv) electrical machinery, (v) transport equipment.
It should be mentioned here that the prior existence of the PDC group of
industries and particularly their relative importance within a country's economy
may affect a) the cost of establishing an arms industry and b) the volume of arms
manufacture and c) the size of the spin-offs. It has been suggested (Deger 1986)
that having a pre-existing developed industrial base and specific capital endowments is quite helpful in setting up and maintaining an arms production industrial complex. However, countries with special security problems (e.g. Israel)
may engage into weapons manufacture which, with purely economic criteria,
can barely afford. Thus, as a general rule, countries which have a smaller potential capacity for defence production compared to actual arms production may
have, a disproportionately high burden of defence industrialization since the
manufacturing and human capital base is inadequate to support the militaryindustrial superstructure. Furthermore, if the existing capacity can not provide
many of the necessary inputs to arms production these will have to be imported.
In practical terms this means that one form of dependency will be replaced by
another. In such a case any potential spin-offs will probably be very weak.
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3.3. Empirical Results
It is natural to expect that any spin-offs from domestic arms production
should be mostly evident in the PDC sectors of the economy, because of the
direct linkages that exist between this group of industries and defence
production.
Such economic spin-offs from arms production will, according to Deger
and Sen (1983), take essentially two forms: a) creation of effective demand for
underemployed industrial capital (or unutilized capacity) and b) technological
progress through a sift in the production function. The latter is aschieved
through the formation of new skills in the relevant industries, the creation
and/or improvement of managerial and organizational expertise, research and
development and so forth.
The specifications of the equations are of course quite general and very
basic. However, even with this basic form any substantial spin-offs from domestic arms production that might exist should be evident. The results of the regression analysis are reported in tables 1 and 2. Due to strong serial correlation in all
but one of the equations (basic metals, BM) a first order autoregressive correction was used. The results are reported in Tables 3 and 4.
In general the estimated equations give interesting results. Given the generality of the specifications they are satisfactorily defined in terms of standard error
of regression and goodness of fit (R-squared) with the exception of basic metals
(BM). Any relevant additional variables would probably improve the fit. The
coefficient of manufacturing is significant and positive except in the case of
machinery (MAC) and transport equipment (TRP) and these results are doubtful
and need further analysis. Let us however concentrate on the coefficients of
military spending. In all but one case (machinery, MAC) they enter the equations
with a negative sign. This is the reverse of what would be expected if there were
any appreciable spin-offs. The situation is slightly improved when this variable is
lagged (Table 4) without however altering the overall picture. In three out of five
cases the ME coefficients have a positive sign but their effect on the indices of
output is insignificant perhaps only with the exception of electrical machinery
(EMAC).
In general the results indicate that in the case of Greece spin-off effects are
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not strong at all. The industries chosen have the best chance of receiving any
beneficial effects. Apparently, such effects may be occasionally positive but they
are extremely weak and negligible. Indeed, the negative signs in some of the
cases may be pointing to the adverse effects of military spending in line with the
findings of other studies mentioned earlier.
4. Conclusion
Domestic arms production by smaller countries such as Greece is primarily
influenced by strategic considerations and motivated by the desire to achieve
greater independence in that field. At the same time it is also hoped that it can
have beneficial economic effects such as aggregate and inter-industrial demand
creation through backward and forward linkages. We tested the hypothesis
using Greek data and a set of industries which are specially susceptible to
defence linkages, the potential capacity for defence in Kennedy's (1974) terms.
Our estimations showed that domestic arms production has an insignificant
effect on these sectoral outputs. We have found scant evidence of any such
stimulus and it would appear that optimistic expectations of appreciable spinoffs remain so far unfulfilled. It is possible that this can be attributed to the
industrial base of the country which may not be strong enough to sustain a fully
developed defence industry and provide the necessary inputs.
Arms production projects are inherently costly, sophisticated in terms of
technology and usually entail a long and unreliable gestation period of expensive
R and D. Even advanced and economically strong countries can rarely afford to
develop and produce independently the full range of weapons required. It is not
surprising therefore to observe a sharp rise in the number of joint international
arms production programmes. The small accomplishments of the Greek defence
industry so far, were achieved largely with imported technology and know-how.
Collaboration and participation in international projects seems to be the only
viable way forward for the Greek arms industry if the existence of indigenous
arms production capacity is considered to be strategically important. Existing
and future European collaboration in joint defence projects (e.g. the European
Fighter Aircraft) offers substantial opportunities for participation by the greek
defence industry for under-licence production of components and sub-units of
weapons systems. This, should eventually result in appreciable spin-offs and
trickle down effects to the rest of the economy.
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